Capital Dynamics: Leading indicators have peaked

Capital Dynamics: Leading indicators have peaked
Tags: Capital Dynamics | FBM KLCI | iCapital.Biz Bhd | Malaysian economy

Written by Surin Murugiah
Monday, 16 August 2010 11:42

KUALA LUMPUR: Capital Dynamics forecasts the Malaysian economy to grow between 6.3% and 6.7% this year and between 5% and 5.5% in 2011.

It said the leading indicators had peaked, meaning growth was high in the first half of 2010 (due to a low base last year) and was expected to moderate next year. It said manufacturing and exports played an important role to support the economy.

“But, we still must look out for developments in the US, Europe and Japan, should demand taper down,” it said.

The fund management company also expects a correction on Bursa Malaysia Securities in the short term (seven to eight months), with immediate support for the FBM KLCI at 1,250 points. It maintains a bearish outlook in the medium term, adding that over the last six months, the local stock market had been volatile, with the technical charts showing bearish indicators.

“The 100- and 200-day moving averages have shown a worrying trend,” it said at the inaugural investor day of icapital.biz Bhd. “We need to look out for confirmation signals.”

On the Malaysian economy, Capital Dynamics said the country had been lagging its regional peers in recent years. “In terms of income per capita, Indonesia overtook Malaysia in 2009. In 1968, Malaysian per capita income was double that of Singapore. Now, Singapore is more than four times higher,” it said.

In terms of budget deficit and government debt, the country was looking more like Greece, it said. “Indonesia, which has outperformed Malaysia since 2005, is still lowering its government debt. Malaysia’s investing spending, on the other hand, has been on the decline,” it said.

On foreign direct investments (FDI), it said Malaysia suffered the worst dip in 2009 compared with its regional neighbours, all of which had attracted at least double or triple the FDI into Malaysia.

Former prime minister Tun Dr Mahathir Mohamed had recently said that FDI into the country was low because foreign countries lacked funds. “If that were the case, why then are the others still getting FDI?” Capital Dynamics asked. “If we look at US corporate earnings, it is still strong.”

The fund manager also said Malaysia needed to up the ante to create a competitive work environment to improve productivity. “About 83% of those employed by Malaysian manufacturers have Sijil Pelajaran Malaysia or lower qualifications. In terms of productivity growth, from 2000 to 2009, we are still lagging Thailand and Indonesia.”


No double dip for China
Capital Dynamics forecasts China’s economy to grow between 9.5% and 10.5% this year, while in 2011, real GDP growth would be at 8% to 9%, driven by consumption growth.

It said there was no danger of a double dip for China, and the Chinese authorities’ fiscal stimulus plans had boosted economic activities. “In 1H2010, real GDP was 11.1%, investments were up 25%. Investments and private consumption are still the biggest contributors,” it said.

It said while Beijing had taken steps to arrest the overheating of its property market, the measures would not cause a collapse of the demand for houses, because while the authorities had curbed speculative activity, they did not raise interest rates.

“The measures were aimed at purchases of second or third homes, so demand from first-time house buyers will still be there,” it said.

It also said, as the Chinese tended to purchase homes using about 50% from their personal savings, there was less danger to the banking system. “Mortgage loans work out to only about 10% to 15% of GDP versus 70% in the US. Household incomes also rose faster than the rise of house prices, so there is no issue of affordability,” it said.


US on the mend
The US economy has been on the mend, with improvements in the demand for durable goods as well as retail sales, while its external trade was also increasing, Capital Dynamics said. It forecasts US GDP to grow 3.7% in 1H2010 and 2.5% to 3% in 2H.

“For the full year, we forecast 2010 growth at between 2.7% and 3.2%, while for next year it will be 2.5% to 3%.”

It said there were five challenges for the US —the fading effects of the temporary stimulus packages; an impaired housing market; high unemployment; unusually uncertain global outlook; and managing the exit from its extraordinary policies.

Capital Dynamics said it did not foresee a double dip for the US economy. “But, there has to be sustained growth over the broad areas of the economy.” Addressing the challenges for the US, it said the world’s biggest economy was turning towards more sustainable sources of growth, which was a positive sign.

On housing, it said the market had bottomed out, so it was bound to move up, and added that mortgage delinquencies had peaked. “US house prices are now more affordable and mortgage rates are at record low,” it said.

On unemployment, Capital Dynamics said recent corporate earnings indicated that companies had the cash, but much of it went towards capital spending.

“Also, due to market uncertainty, many companies want to retain cash in case they have to face another financial downturn.

“Furthermore, the Obama administration is pushing for several Bills, so employers might want to wait out and see the implications of these laws, on whether it would be more expensive to hire,” it said.

However, it said employers would soon have to start hiring, when demand increases for their products.

A more pressing issue for the US were the external factors, especially the overhanging eurozone debt worries.

“But so far, the European authorities have demonstrated the political will to carry on with the measures, to ensure that Europe does not suffer the same fate as Lehman Brothers in the US,” it said.


This article appeared in The Edge Financial Daily, August 16, 2010.